Six principles governments around the world should heed when considering blockchain regulation

All over the world, entrepreneurs and technologists are developing novel uses for cryptocurrencies and the open blockchain technologies they power. Depending on how those developers apply these technologies they may find themselves caught between various laws and regulatory regimes. Savvy governments are responding to the problem by beginning to formulate their approaches to cryptocurrencies like Bitcoin.

It is the responsibility of government to strike the right balance between achieving its regulatory objectives, such as consumer protection, while maintaining a fertile environment for these new technologies to grow. Inadvertently stifling cryptocurrencies and open blockchains puts a nation at risk of taking a back seat during a wave of financial innovation. But these technologies are complicated and at times arcane; often crossing over into multiple areas of law while creating unexpected gray areas. So how can a government approach them with a “do no harm” mindset?

Coin Center frequently engages with government representatives from around the world to help them think this through. Through those conversations we’ve come up with six principles that we have found to be at the heart of successful approaches to government regulation or self-regulation by the industry.

We recently sent a letter outlining the six principles to the Government of India’s Department of Economic affairs, which is presently looking at the right approach for India, and have summarized them here:

Understanding who and what can be the subject of regulation. It may be possible to regulate individual parties who use the network customer-facing business that safekeeps bitcoins for their users), but the network as a whole is a decentralized web not amenable to easy regulation.

Clearly articulating the goals of a cryptocurrency regulatory policy. Cryptocurrency regulatory policy should have clearly defined goals. In general there are two primary goals: consumer protection and engaging in anti-money laundering.

Only regulating persons with “control” over consumers’ cryptocurrency. In the cryptocurrency space it can be difficult to determine which actors actually hold, and therefore can lose, customer funds. We’ve worked with the Uniform Law Commission to develop a clear definition for what constitutes control: “the power to execute unilaterally or prevent indefinitely a [cryptocurrency] transaction.”

Cooperating with businesses to preserve visibility. When it comes to anti-money-laundering policy, it is important to work with companies in the space rather than against them. Companies can provide expertise and visibility into cryptocurrency networks. If there is no reasonable path toward regulatory compliance, then capable allies for law enforcement are forced out, leaving only bad actors.

Treating all cryptocurrencies equally. An attempt to limit a regulated exchange’s activities to one or another cryptocurrency would likely backfire. Users may prefer another and simply find access to exchanges based elsewhere that are willing to deal in the cryptocurrency of their choice. Additionally, the proliferation of several competing cryptocurrencies is indicative of a highly innovative market.

Ensuring that regulatory requirements are reasonable. When applying any particular regulatory framework to users of these technologies it’s important to be conscientious of what is and what is not possible or feasible to require from regulated firms.

A government that applies these principles to cryptocurrency regulation will be on course to develop sound policy toward the technology. Understanding, engagement, and a transparent regulatory processes are the keys to a successful approach. In doing no harm and allowing this vibrant sector to flourish, it will be possible to achieve one’s regulatory goals while preserving an innovative climate and rights of citizens to reap the benefits of open blockchain networks.

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permissionless blockchain technologies.